In a recent interview Jonathan Morduch looked back at what we’ve learned about microfinance and financial inclusion in the past decades, and shared how he thinks those lessons can shape future policies to help poor families better manage their money. Morduch was interviewed by Marc Labie, Professor at the Université de Mons and Co-Director of the Centre for European Research in Microfinance (CERMi) for a special 50th anniversary edition of the French and Belgian Journal Mondes en Développement (Developing Worlds).
In this blog series we’ll share excerpts of their conversation, which covers how microfinance fits into the context of broader international development and anti-poverty policies, how the buzzwords used in microfinance reflect shifts in priorities, and evolving views on women’s empowerment, group lending, and entrepreneurship, and more.
Part 1 starts with a look back at the world in 1973, as new ideas about poverty and development were entering the mainstream within the major international development institutions. Microfinance was part of a pivot away from large capital projects and a focus on GDP growth, and towards poverty reduction and microeconomic priorities like nutrition, education, and gender. From there, world events and intellectual currents of the 70s and 80s shaped the narrative about the purpose and impact of microfinance.
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ML: Mondes en développement is, roughly speaking, 50 years old. Before we begin discussing microfinance, let’s step back. Which elements during the past five decades of international development are most important for understanding microfinance?
JM: First, bon anniversaire to Mondes en développement! The 50 years and 200 issues of the journal are a great accomplishment. Congratulations. Those 200 issues also open a window through which to see shifting debates and understandings—both for microfinance and for international development. François Perroux’s Issue number 1, which launched in 1973, is striking. Looking back, 1973 was a pivotal year for international development – and it was important too for microfinance. Issue number 1 was arranged around the theme of “unequal development,” and two essays were contributed by Gunnar Myrdal, the Swedish economist and 1974 Nobel laureate. His first essay was on a “more realistic” theory of development, and his second was on “the world poverty problem.” Both pushed against post-war notions of “modernization” and the idea that development equals GDP growth and industrialization.
What was so striking about 1973—and what we can see much more clearly today—is that the kinds of criticisms made by Perroux, Myrdal, and others were in fact entering the mainstream at that very moment. Most famously, in September 1973, Robert McNamara, who was then the President of the World Bank, gave a well-known speech to the joint World Bank-IMF meetings in Nairobi, Kenya. That speech marked a tectonic shift in World Bank policy, bringing commitments to focus on absolute poverty (especially rural poverty), gender, nutrition, health, and basic education. The shift also brought a focus on working with NGOs and the private sector, not just governments. Until then, the World Bank had championed GDP growth and large capital projects, but McNamara’s 1973 speech took up the fight against “unequal development” and made poverty reduction the new mandate for the World Bank. In its rhetoric, at least, the hegemon gobbled up its critics.
What does this have to do with microfinance? This shift to microeconomic priorities (poverty, gender, nutrition, etc.) repudiated the idea that development was mainly a macro (GDP) problem. And that provided the opening for microfinance. Muhammad Yunus’s first experiments in Bangladesh started several years later, around 1976, and Yunus came to describe microfinance as, first and foremost, a way to reduce rural poverty, even in the absence of macro growth. Eventually microfinance came to be seen as a way to serve women, to help raise the living standards of struggling families, and to do so through a non-governmental movement. Everything in microfinance was in line with this new micro-focused development thought from 1973.
ML : So, like Mondes en développement, microfinance, in its “modern” form, is also roughly 50 years old. Are there other ways that microfinance and broader development thinking intertwined.
JM : Another global upheaval also had roots in 1973. This one did great damage. This is the global debt crisis, and it was also a vital context for microfinance. 1973 was the year of the Yom Kippur War, when Israel’s neighbors launched a surprise attack. The United States supported Israel, and in the aftermath, the oil-rich countries of the OPEC cartel placed an embargo on the United States and other countries, effectively restricting the global oil supply. By early 1974 the price of oil had nearly quadrupled. The price increase devastated low-income economies that depended on foreign oil for development plans. The loans owed to global banks could no longer be repaid, and they were renegotiated on tough terms. The IMF and other lenders imposed austerity measures that led to large cuts in social spending around the world. Criticisms of the IMF filled the pages of Mondes en développement as well.
This macro context, which was reinforced by the laissez-faire leanings of Reagan and Thatcher in the 1980s, also framed microfinance. To simplify (perhaps too much): the “micro” commitments to reducing poverty and inequality from 1973 clashed sharply with the “macro” and financial imperatives that resulted from the debt crisis. They clashed too with the Reagan-Thatcher free-market ideology and the economics of austerity.
Yet what is most remarkable about microfinance is that it thrived amidst this conflict! Or, more precisely, it thrived because of the conflict.
Yunus and the early pioneers promised to reduce rural poverty while operating business-like nonprofit banks. The entrepreneurial spirit of poor people would be unleashed, allowing them to escape poverty through their own hard work and ingenuity. At the same time, the pioneers argued that their new intervention did not require large government outlays beyond start-up capital.
This was the genesis of the original “win-win” formulation for microfinance. Microfinance promised to deliver poverty reduction by supporting entrepreneurship (a big “win”) that worked without needing continual government subsidy (another big “win” in a time of austerity)! It had great success as a marketing strategy, and it was tailor-made for its moment in the late 20th century.
But, in retrospect, we can also see that important claims about microfinance were misleading or simply wrong. The theory and data on which they rested were flimsy. And yet – here is another surprise – microfinance flourished nevertheless. To understand why, we need a different narrative. That narrative highlights the importance of instability and illiquidity in people’s lives, and the role that microfinance plays in managing that instability and providing liquidity.
ML: So, during these roughly five decades of microfinance, it seems that we can identify three periods: the first decade (the 70’s) when most observers were skeptical of the ability to provide financial services to financially excluded people, and when attempts by state-owned banks were heavily criticized for being inefficient and overly-politicized; followed by three decades (80’s, 90’s and 2000’s) of overpraised expectations for microfinance; and, lastly, the last ten years during which criticism has clearly dominated the field. What lesson do you draw from these 50 years?
JM: When we look back to that middle period—the heyday of microfinance leading up to the 2006 Nobel Prize to Grameen Bank and Yunus—we can see that reality was much more complicated than was advertized, and not all claims were true. It is not true that every villager wants to be, or can be, an entrepreneur. It is not true that borrowing, on average, leads to transformational gains in income. Those fundamental parts of the microfinance narrative have to be set aside. But the criticisms of the past decade have also been over-stated.
My sense of optimism comes from seeing the unraveling of the original microfinance narrative, and seeing it replaced by more accurate understandings of the financial lives of poor families. This was a motivation for the work behind Portfolios of the Poor (Collins et al., 2009). The book documents people’s financial lives by following their strategies and daily lives, not by looking through the lens of microfinance.
The financial diaries revealed that most people want and need credit in order to manage a wide range of household expenses, from keeping food on the table to paying for healthcare to making household repairs. Funds for business are often needed, but they are just one financial need among many. Experts and policymakers think about poverty as fundamentally a problem of low incomes. This is, of course, a big part of poverty. How could one argue otherwise? But poverty is also very much a spending problem, as households struggle to get hold of the right money at the right time for important needs. The challenge of illiquidity is hidden in the large surveys used to analyze inequalities, but the financial diaries make it clear, family after family.
A few months ago, I was described as a “former microfinance sympathizer” in a magazine, but that gets it wrong. I still very much believe in the value of the financial access that microfinance can bring. Recent criticism of microfinance, based on results from randomized experiments, places too much weight on weak results on households’ business profit and impacts on household income. In practice, most households use microfinance as a source of general liquidity, to facilitate lumpy spending and smooth consumption. We need to take seriously the value of that capability.
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The full article, “A dialogue on the future of microfinance and international development,” published in Mondes en Développement is available here (with access through NYU or another academic institution), or in an ungated draft version here.